Welcome to 2016 – a new year always brings with it anticipation and anxiety – as well as new beginnings. In that spirit, we are happy to unveil our new website and company logo for Pfeifer Advisory LLC.
We hope that you’ll agree that the new look is bold and crisp. A big thank you to Dave Gillaspie of Impact Productions for his work in designing the new look for us. In addition, the website will become a more substantial source of unique industry information and insights in the coming months – so please stay tuned and come back often to visit the site. One thing has not changed, however, and that is our commitment to our clients to deliver the most insightful, strategic, and unvarnished consulting services regarding life insurance and annuity products and markets.
As we turn the page into 2016, here are ten significant drivers that will impact the direction of the life insurance and annuity markets in the coming year:
1. Interest Rates Increase:
In December, the Federal Reserve raised its benchmark Federal Funds Rate by 25 basis points, the first increase in this rate in nearly a decade. Some see this as a first sign of a future pattern of steadily rising interest rates, while others see it only as a one-off move that will be subject to choppy economic conditions. The life insurance industry as a whole would welcome steadily rising interest rates all along the yield curve, not just at the short-end. Such rate increases would provide relief to inforce product profitability as well as to new business competitiveness. A better barometer than the Federal Funds Rate for the life insurance industry is the 10-Year Treasury Rate, which has fluctuated in a fairly narrow range from 1.68% to 3.01% over the past two years, and which hasn’t risen noticeably in tandem with the Fed’s recent twenty-five basis point increase.
2. Department of Labor Fiduciary Rule:
No subject has grabbed more industry attention than the possibility of the enactment of new Labor Department rules concerning the expansion of fiduciary responsibilities for IRA rollovers on qualified retirement business. This expansion would particularly impact variable annuities and mutual funds. The life insurance and mutual fund industries have fiercely fought the direction targeted by the DOL in its proposed rule. Thousands of comment letters have been generated, and public hearings were held in August of 2015 to voice both support and opposition. A final DOL rule is expected in early 2016, and a number of industry strategies have tried to delay or scuttle the proposal. The primary industry concerns are the cost of compliance, the ambiguity of certain definitions (such as “advice”) and the associated risk to reps, elimination of heaped sales compensation and bonuses, and the forfeiture of the middle market to robo-advisers and other fee-based distribution.
3. Equity Markets:
Since the economic debacle of 2008, the U.S. equity markets have been on a solid run. That run came to an end in 2015, with both the Dow and the S&P 500 experiencing declines (the NASDAQ Composite managed a modest gain for the year.) The most notable characteristic of the equity markets in 2015 was its nerve-wracking volatility. Out of 252 trading days in 2015, the DJIA rose or fell by triple digits in 124 of those days (49%). Such volatility dissuades many buyers of full equity exposure products, like variable annuities, variable life insurance, and equity mutual funds. On the other hand, such activity may encourage buyers to consider equity-based products with guaranteed components like indexed products and variable products with guaranteed minimum benefits. Many stock market experts are predicting a 5 to 10% gain in the major equity indexes in 2016, but with continued choppiness, as the European and Asian economies struggle.
4. Principles-Based Reserves (PBR):
After more than a decade of effort on the part of insurance actuaries and regulators, it appears that Principles-Based Reserves (PBR) for life insurance contracts is nearing reality, as the last few state jurisdictions adopt the necessary SVL legislation. In all likelihood, PBR will become effective on January 1, 2017, and insurers will have a three-year transition period after that date to migrate to PBR for new sales. So, why are we including PBR as a major driver in 2016? The reason is because PBR and the associated Valuation Manual (VM-20) require highly complex sets of calculations and assumption protocols, and quite frankly, all but the largest life insurance companies are ill-prepared today to adopt PBR. Calendar year 2016 will be needed to understand what is required to satisfy the assumption and calculation provisions, including the staffing levels needed. As important, life insurers will use 2016 to assess which products benefit from PBR, which do not, and which occasionally benefit. It is reasonable to expect that term products and secondary guarantee UL will receive the most attention, as reserves for these products significantly exceed any cash value available.
5. 2017 CSO Mortality Table:
Lost in the shuffle of all of the PBR and DOL rumblings has been the introduction of a new valuation and nonforfeiture mortality table, the 2017 CSO. The new table will supersede the 2001 CSO Table, and will likely be available for use as of January 1, 2017. As with PBR/VM20, there is a three-year transition period allowed for adoption of the 2017 CSO. This table can be adopted by a carrier even before PBR is implemented. Like the 2001 CSO, the new 2017 CSO accommodates Preferred Risk Tables and Relative Risk versions and has a 25-year select period. As would be expected, the mortality rates under the 2017 CSO are generally (but not always) lower than the corresponding 2001 CSO rates.
6. Index Products:
Indexed annuities (FIAs) and Indexed Life (IUL) have been the explosive sales drivers of the annuity and life insurance segments, respectively. Despite low interest rates, these products have attracted policyholders with the potential for strong returns with limited downside. In addition, FIAs have benefited from the appeal of the guaranteed income story. New sales illustration rules adopted by the NAIC in 2015 created more uniformity around IUL sales illustrations, but innovation has already occurred in ways that allow insurers to differentiate themselves. Low-volatility/hybrid indexes have stood out to energize FIA sales, but have yet to make strong leap to IUL contracts.
7. Variable Products:
The challenging equity markets have made the environment for variable annuity and variable life products difficult over the past five years. Sales of variable annuities have been stagnant since 2008. Variable Life sales had a resurgence in 2013 and 2014, but prior to that time, had dropped for many years. Many insurers have left the variable products business, and only one has entered. The successes in the variable business almost all relate to generous guaranteed benefits, whether guaranteed income or guaranteed death benefits. In fairness, the level of reported variable life sales may be understated due to the presence of offshore Private Placement VUL activity.
8. Underwriting Trends:
The unmistakable trend in life insurance underwriting today is smarter, faster, and less invasive. Insurers believe that today’s consumer wants to buy life insurance using a process similar to that of purchasing other goods and services. That means eliminating or reducing APSs, para-medicals, fluid draws, and EKGs in favor of database checks and telephonic interviews. The buzz word is no longer Simplified Issue, because that term means little anymore. Instead, Accelerated Underwriting describes the overall category of smarter and faster.
9. Earnings Pressures on Public Insurers:
The low interest rate environment has pressured the earnings of all life insurers, as interest spreads on new and inforce business have shrunken or disappeared. Yet the pressures have been greater on publicly-traded life insurers since public shareholders tend to have a shorter-term outlook on acceptable returns and because mutual companies are (on average) larger and have greater short-term flexibility in managing asset portfolios. Profit targets for mutual insurers are consistently lower than profit targets for publicly-traded carriers (by 150 to 200 basis points of after-tax IRR) across all products. (Privately-held insurers fall between the mutual and the publicly-traded stock carriers in profit hurdles.) This difference is explained partially by mutuals’ sales of participating/dividend-paying products, but the difference still exists on products where mutuals expect to pay no dividends.
10. Proprietary Products/Features
The traditional product development model of creating relatively generic products to be distributed by a large collection of diverse distribution outlets is transforming. Too many companies have realized the disappointment of developing a vanilla, cookie-cutter product without explicit distributor involvement that has resulted in lackluster sales. The future will include proprietary products and features that are developed in conjunction with successful distribution outlets. Such arrangements are characterized by the insurer relying heavily on the distributor for product design input in exchange for the distributor’s delivery of sales goals. Such arrangements have begun to flourish on the indexed annuity front – over 30% of Q3 YTD sales of indexed annuities were associated with proprietary product packages, and more are teed up for 2016.